Appeals Court Rejects Claims by American Indian Payday Lenders

Updated, 8:10 p.m. | A federal appeals court on Wednesday denied a request by two American Indian tribes to stop New York State’s top financial regulator from cracking down on their online lending businesses, the latest victory in a sweeping battle to stamp out the high-cost loans.

The decision from the United States Court of Appeals for the Second Circuit comes more than a year after the tribes sued Benjamin M. Lawsky, superintendent of the state’s Department of Financial Services, arguing that he had overstepped his jurisdictional bounds in trying to regulate business activity that takes place place on Indian reservations in Oklahoma and Michigan.

The ruling upholds a decision from Judge Richard Sullivan of Federal District Court in Manhattan, who denied a request for preliminary injunction last year. In that decision, Mr. Sullivan suggested that once tribal businesses go online to attract consumers, many of whom live far beyond the borders of their reservations, they effectively lose their rights to operate as sovereign nations. The case is hardly over, though. The lawsuit is continuing in federal district court.

Mr. Lawsky’s office has taken aim at payday lenders, which offer short-term loans at interest rates that can soar above 300 percent. The latest ruling also offers a window into a battle that has pitted state and federal regulators against a range of payday lenders across the country that have tried to avoid interest rate caps in 15 states.

To choke off loans that exceed New York’s interest rate cap of 25 percent, state and federal authorities have focused on many players in the payday loan ecosystem. Last August, for example, Mr. Lawsky sent letters to 35 online lenders, telling them to “cease and desist” from making loans that violate New York’s usury laws. And his office also went after the banks that give the lenders critical access to borrowers’ checking accounts.

The decision on Wednesday could bolster that broader fight. In their lawsuit, the tribes — the Otoe Missouria Tribe in Red Rock, Okla., and the Lac Vieux Desert Bank of Lake Superior Chippewa Indians in Watersmeet, Mich. — argued that their sovereign status shielded them from the reach of New York State.

The appeals court disagreed, outlining in a 33-page opinion that the borrowers reside in New York and received the loans, “certainly without traveling to the reservation.”

The opinion goes on to say that despite that “a court might ultimately conclude that, despite these circumstances, the transaction being regulated by New York could be regarded as on‐reservation, based on the extent to which one side of the transaction is firmly rooted on the reservation.”

The decision is the latest setback for the Indian tribes. Last year, the Consumer Financial Protection Bureau rejected an argument from three Indian online lenders that argued their sovereign status protected them from an investigation by the agency.

Mr. Lawsky’s office cheered the decision. “We’re pleased with the court’s decision. Moving forward, we will continue to take strong action to protect New Yorkers from those who violate our laws and trap consumers in destructive cycles of debt,” he said in a written statement.

The Native American Financial Services Association, a trade group representing the tribes in the lawsuit, said: “We are very heartened by the court’s recognition of the deep Supreme Court legal precedent and federal law regarding Native Americans’ sovereign rights and the fact that its own ruling was limited by the facts available to it at this early stage of the case, the procedural hurdles the tribes had to clear in order to reverse the district court’s ruling, and the novelty of the issues arising from e-commerce business.

“Importantly, the court recognized that, ‘[t]he tribes are independent nations, and New York’s regulatory efforts may hinder the tribes’ ability to provide for their members and manage their own internal affairs.'”